AUCKLAND, Jan 23 (Reuters) - The founder of
file-sharing website Megaupload was ordered to be held in
custody by a New Zealand court on Monday, as he denied charges
of internet piracy and money laundering and said authorities
were trying to portray the blackest picture of him.

Prosecutor Anne Toohey argued at a bail hearing that Kim
Dotcom, a German national also known as Kim Schmitz, was a
flight risk "at the extreme end of the scale" because it was
believed he had access to funds, had multiple identities and had
a history of fleeing criminal charges.

"The FBI believes the sums located are unlikely to represent
all the overseas bank accounts owned by Mr Dotcom," she said.

But Dotcom's lawyer said he posed no threat of absconding or
restarting his businesses, arguing that his client had
cooperated fully, his passports had been seized and his funds
frozen, and also that he had a distinctive appearance.

"He is not the sort of person who will pass unnoticed
through our customs and immigration lines and controls," said
defence lawyer Paul Davison of the former hacker, reportedly 2
metres (6ft 6ins) tall and weighing more than 130 kg (285 lbs).

Judge David McNaughton said the bail application was too
complicated for an immediate ruling, adding he would issue a
written decision no later than Wednesday.

"Given the breadth of issues covered in this bail
application and the seriousness of the issues, I am going to
reserve my decision," the judge said.

U.S. authorities want to extradite Dotcom on charges he
masterminded a scheme that made more than $175 million in a few
short years by copying and distributing music, movies and other
copyrighted content without authorisation. Megaupload's lawyer
has said the company simply offered online storage.

Prosecutor Toohey said two other men sought on global
warrants for involvement in Megaupload had been arrested in
Europe.

The shockwaves of the case appeared to be spreading among
rival websites offering lucrative file-sharing. FileSonic, a
website providing online data storage, said in a statement on
its website that it had halted its file-sharing services.

"All sharing functionality of FileSonic is now disabled. Our
service can only be used to upload and retrieve files that you
have uploaded personally," it said.

BARRICADED IN SAFE ROOM

Dotcom, 38, and three others, were arrested on Friday after
New Zealand police raided his country estate at the request of
the U.S. Federal Bureau of Investigation. Police cut Dotcom out
of a safe room he had barricaded himself in, because, according
to his layer, he was frightened and panicked.

Presenting the case for flight risk, the prosecutor said 45
credit cards in three wallets were found in the mansion under
Dotcom's various names, while three passports were also found.
But his defence lawyer said: "My client collects them (credit
cards), most of them are out of date."

Dotcom smiled and waved at around 20 supporters who filled
the courtroom and spoke to them after the judge's decision.

Defence lawyer Davison said Dotcom was "realistic about what
is happening".

"He would obviously prefer to be at large. He doesn't want
to be there any longer than he absolutely has to be," he told
reporters outside the court.

Media reported that Dotcom ordered around NZ$4 million ($3.2
million) of renovations to the sprawling mansion that he leased
near Auckland, with its manicured lawns, fountains, pools,
palm-lined paths and extensive security.

The case is being heard as the debate over online piracy
reaches fever pitch in Washington, where Congress is trying to
craft tougher legislation.

Lawmakers stopped anti-piracy legislation on Friday,
postponing a critical vote in a victory for Internet companies
that staged a mass online protest against the fast-moving bills.

The movie and music industries want Congress to crack down
on Internet piracy and content theft, but major Internet
companies such as Google and Facebook have complained
that current drafts of the legislation would lead to censorship.

Critics of the U.S. Stop Online Piracy Act, or SOPA, and
Protect IP Act (PIPA), quickly showed their opposition to the
shutdown of Megaupload.com, with hackers attacking the public
websites of the Justice Department, the world's largest music
company Universal Music, and the two big trade groups that
represent the music and film industries.

Dotcom's New Zealand lawyer Davison said in court that
Megaupload's business was being misrepresented and authorities
were being aggressive to add drama to the case.

"His business did not reproduce or copy material as
alleged," he told the court, adding that copyright holders had
been given access to Megaupload to identify improper posting of
material. He likened the site to the popular YouTube video site,
where people "promoted their creativity".

In New Zealand, questions are being asked about how Dotcom,
who moved to the country in 2010, could be given permanent
residency under a business investor scheme despite criminal
convictions for insider trading.

LAVISH LIFESTYLE

A legal expert said extradition arrangements between New
Zealand and the United States were reasonably straightforward
and standard, but there were some important factors.

"The offence for which extradition is sought must be an
offence in the jurisdictions of both states," said Otago
University law professor Kevin Dawkins, adding that an accused
must be tried on the offence for which they are extradited.

New details emerged about Dotcom's lavish lifestyle and
tastes, with reports that he had a heated lap pool built just
off the master ensuite, with underwater speakers, imported
spring water and a custom ladder worth around NZ$15,000.

"It's insane, and it gets more insane inside. When we were
there we called it 'extreme home makeover, millionaire
edition'," a source close to the teams that did renovation work
the New Zealand Herald.

A film posted on the Internet shows Dotcom, surrounded by
topless women and men spraying champagne on board a superyacht
during a "crazy weekend" in Monaco reported to have cost $10
million.

The FBI estimates that Dotcom personally made around
$115,000 a day during 2010 from his empire. The list of property
to be seized, includes nearly 20 luxury cars, one of them a pink
Cadillac, works of art, and NZ$10 million invested in local
finance companies.
($1 = 1.2433 New Zealand dollars)
(Additional reporting by Gyles Beckford in Wellington and Ed
Davies in Sydney; Editing by Ed Davies and Alex Richardson)